Stock Market -- Fundamentals Through 2016

My little business outlook through next year would ordinarily be regarded as the plainist of plain
vanilla, but in today's sloppy environment, it seems positively heroic. There is sufficient monetary
liquidity / credit availability in the US financial system to support business sales growth of 5%
and SPX net per share growth of 6% by year's end 2016. This estimate includes improved physical
volume growth and an increase in pricing power from 0% today up to 2%. I expect the WTI oil
price to average in the mid - $50s per bl. and for global economic supply and demand to come into
modestly better balance as demands lifts a bit and on an expectation that shut ins of unprofitable
capacity accelerates. I am looking for the $USD to lose ground down to the 85 - 90 area and for the
the Fed Funds rate to rise up to 1.00% by year end 2016 as the Fed gradually restores normalcy
to the system. The key assumptions in all of this is that US monetary velocity or turnover stabilizes,
and that consumer, business, and banker confidence will support it.

I figure that SPX net per share will increase from $115. this year to $122 next year and that the
p/e ratio for 2016 will be at 17.7x. Thus I look for the SPX to close out 2016 at about 2160 or
modestly above the earlier in this year record close of 2135. If these projections are well in
the ball park on profits growth, inflation and the Fed, the market could receive an extra boost
from significant rotation out of bonds into stocks.

I do have a simple fair value model of the SPX based on longer term assumptions of business
volume growth, the inflation rate and earnings plow back rate. The model has the SPX fairly
valued at 1870 for 2015 and 1985 for 2016.

Every 7 - 10 years the world seems to go through a period when Murphy's Law -- Whatever
can go wrong, will -- begins to nip away at our institutions, economy  and markets. The US
stock market has sometimes sailed right through these periods, but you folks need to be extra
vigilant in the years straight ahead to see where Old Murph might surface, and what disturbing
developments might do to confidence and the markets. We are definitely moving into a period
where shit assuredly happens!
 

SPX -- Weekly Technical

The market remains in correction mode and continues on an intermediate term sell signal. Recent
 price action does throw the idea of a quick spike or "V" bottom as occurred over 2012 - 2014
into doubt. My longer term, smoothed momentum indicator is at a mild -4. This compares to a
mild -7 at the worst of the 2011 correction, but does show the market to have near term vulnerability, 
 even if it was to subsequently recover and move well higher in the months ahead.  SPX Weekly

The chart shows significant technical damage to the SPX. The evidence on the chart is not sufficient
to imply that a bear market has begun. Simply look back at 2011 and also recall the fierce, positive
whipsaw that happened in the latter part of 1998. However, even if the market recovers and moves
on, the protracted deterioration of momentum as seen in the MACD  panel of the chart, suggests a
rapid and dramatic positive reversal in MACD would be the less probable case.

The bottom panel of the chart shows the intermediate term stochastic. It is giving an oversold reading.
The norm is to get two of these a year and they are often tradeable even in a more marked downturn.
This is the first one since late 2012. An oversold stochastic reading can whipsaw, but they are always
interesting and require attention.

The reasonable possibility of further near term market weakness notwithstanding, I am guessing that
the market will experience another extended, but mild upturn which could carry to a new high for
the SPX. This is based on a fundamental judgment as opposed to the current technical position of
the market and I would not bet on it until we see positive reversals in the indicators shown on the
chart.

SPX -- Daily Chart

It has often been said that the current bull market has been one of the unhappiest in history. It is
true that there has been a continuous litany of caveats, complaints and criticisms. With QE 3,
most of the querulousness was swept aside as the market made a tightly drawn beeline nearly
relentlessly higher. With termination of all QE by the Fed in latter 2014, the path of the market
has been more tortured. Without the big tailwind of a huge period of liquidity growth, the worries
and insecurities of investors and traders have resurfaced. The economy has returned to sluggish
growth, the Phillips Curve (falling unemployment leads to increasing inflation pressure) has been
absent, and the Fed has been talking about returning monetary policy toward normalcy with boosts
to short term rates while the economy continues not to behave normally. With the substantial drop
in the market going into Sep., and a subsequent struggle to recover, market consensus has
dissolved and insecurities reign. SPX Daily

The SPX is no longer oversold short term on a momentum basis. I am partial to momentum
measures on an intermediate term basis and the extended time measures of RSI and MACD are
still deteriorating on a trend basis. So, I have the market on a technical sell signal, and since these
are trend following measures, there is precious little chance I will catch the bottom if a more
sustainable rise occurs.

Other favorite indicators such as the TRIN and equities only put to call ratio contine to signal
that the market is at a substantial oversold position with an elevated p/c ratio and strong selling
pressure captured by a rising by a rising TRIN  

Note also the progressive decline in the % of SPX stocks selling above their 200 day m/a's
(bottom panel) to an oversold position.

These oversolds are tempting and suggest a stronger market is out there in the not so distant
future. The problem is that when players have a welter of insecurities, churning volatility can
continue on for several weeks. (As noted above, I will probably miss the low).             

Monetary Policy

2015 marks the sixth year of economic recovery. Yet, it was not until the late summer of 2014
that the expansion was mature enough to warrant an increase in short term interest rates. The Fed
passed on those moments. Now, the indicators that have best worked in the past to forecast that
a rise in the Fed Funds rate (FFR) was timely suggest that, if anything, the FOMC  should take a
step to ease monetary policy. Production growth momentum has been slowing, capacity utilization 
indicates continued slack, banking system liquidity is ample, and the demand for non - financial 
commercial paper has begun to ease.

With a slowing economy based on monthly data, the Fed was correct to pass up a chance to raise
the FFR in 2014 when economic momentum was strong. Here we are now with a sluggish economy
and little if any inflation impetus. Since the economic recovery began in early 2009, the pace of
expansion has slowed significantly in the wake of each QE termination. The monetary policy
factor that has dogged this economic recovery has not been interest rates, but periodic turn offs
of the liquidity tap.

The question of raising the FFR now seems more of an academic issue than a genuine economic
one. Now one could argue that if the fate of the continued progress of global expansion hangs in
the balance because of a 25 basis point increase in the FFR, we have perhaps been deluding
ourselves over whether the world can climb all the way out of the economic hole we dug for
ourselves earlier in the prior decade. So, from an economic perspective, maybe a couple of bumps
up in short rates will not prove very destructive at all.

My concern with monetary policy is whether consumer, business and lender confidence will remain
strong enough to transition away from economic growth driven by central bank expansion of
monetary liquidity to progress fueled by internally generated funds from economic activity boosted
by the continued private sector credit growth. My preference would be to monitor how this
transition is proceeding before pushing up the FFR especially since private sector liquidity appears
adequate to support it. Let's first  see if industrial output can regain momentum with rising operating
rates and if the consequent cyclical pressures start to push up the inflation rate.

Do Not Forget Commodities....

The commodities market remains cheap. Since 1970, the CRB Commodities Composite has spent
precious little time below 200, where it sits now. Granted, that which is cheap can remain so or get
even cheaper. However, since the direction and momentum of the commodities market tends to lead
inflation or, deflation, and since the way commodities go can have a major impact on the general
price level, it may be worth your attention now. CRB Weekly

The top panel shows the yr/yr % change for the weekly price. A 52 week decline is very substantial
by historical standards and it is worth noting that the flattening out of negative momentum through
2015 happens to coincide with a topping pattern for the US dollar (the dollar still rules in the
commodities market). A further run - up in the dollar in 2015, should it weaken the CRB further,
would strengthen the outlook for eventual global deflation, which would be a very undesirable
outcome given the still elevated level of debt leverage in the world. I like the USD long term, but
think it is well overdone to the upside at the current level of 96. It is reasonable down in the 87-88
area in my view.

The CRB and other broad commodities composites remain heavily oversold and are at large discounts
to fair value measures based on cost of production plus a reasonable measure of profit (For more,
see Commodities Market from 7/30/15).

Check out the bottom panel of the chart. It shows the relative strength of the CRB compared to the
SPX. It does not get much lower than the .10 you see there, and since the continuation of the RS
line at .10 extends beyond the downtrend line for RS since the summer of 2012, we might be
looking at an interesting situation, relatively speaking.

US Stock Market

The Correction 
When I look back on the suddenness and violence of the recent price decline, I still do not see the
sharp outlines of an oncoming iceberg that made the other guys jump ship. Naturally, the history
of the market is littered with price corrections, and Lord knows, one was perhaps long overdue.
However, I still think the guys jumped ship too early.

The correction has greatly widened the playing field as seen on this daily rendition of the SPX 
The market is currently challenging the steep downtrend in place, but with the employment report
and a three day weekend just ahead,  players could wait for the unofficial end- of-summer return
of the heavy hitters next week from holiday. Given the new broader range for the market, an
elevated VIX (bottom panel of the chart) seems appropriate.

Valuation
The basic market directional fundamentals I use to judge the market are still intact in favor of a
rising SPX although liquidity growth is far less robust. On that score, I ended my low risk
view of the market in the closing months of 2014. At the SPX high of 2135 set earlier this year,
the market traded about 19.5x 12 months net per share. That is an elevated level by any sensible
long term measure. However, although a p/e ratio has substantial empirical content, it is also
heavily influenced by investor confidence. Because of this psychological element, it is very hard
to use valuation successfully to time the market. And so, in this case the market received a quick
p/e haircut on rapidly waning confidence (I hope that players do not go for a buzz cut and bring
the market below crucial support in the low 1860s on the SPX).

I do use a valuation measure based on long term trend earnings and I give heavy weight in estimating
a 'fair value' p/e level based on a  long term measure of the earnings plow back ratio (Higher plow
back implies faster longer term earnings growth and a higher p/e multiple). Long run trend earnings
for 2016 stand at SPX $117 a share, and my fair value p/e based on a 60% plow back ratio is 17x.
So I see the SPX as reasonable at about 1990. Note too, that the previous high of 2135 did not
represent a significant overvalued level with my approach).

Concluding....
There is fear in the market and with guys like me, there is quizzicality. In turn, my indicators show
an impressive oversold condition is also in place. We will just have to see how it all plays out.

US Stock Market -- Some Thoughts

Correction In Place
The SPX fell about 12% from its peak before recovering substantial ground later in the week.
Peak to trough so far, the SPX fell to a sharp and trade worthy oversold of 6.2% against the
25 day m/a earlier in the past week but has bounced to a moderate short term oversold of 3.2%.
It is an open question of how serious the correction is. The SPX has fallen below its 200 day m/a
and the 200 day has rolled over for the first time since 2011. Moreover, like the deep 2011 price
decline, both the RSI and MACD measures have been trending down for several months as lead-ins.
On the plus side, all the sharper down moves in the SPX since the 2011 correction have seen 'spike
low' patterns where recovery has been fairly rapid and where new highs were attained. SPX Daily

Room For Another And Perhaps Final Leg Up?
The cyclical bull is six years old, but there are capital resources -- idle capacity, labor, and credit
availability -- which remain untapped or underutilized and which are sufficient to carry economic
expansion into 2017 if exploited. Bull markets normally do not end until the economy is overheated.

But, to get this last up leg in the market, the economy must continue to transition to a credit driven
expansion which is far less reliant on continued growth of monetary liquidity. The failure of the
stock market to sustain the new highs in 2015, as modest as they were, means there are plenty of
second thoughts among investors concerning whether it is advisable to pay premium p/e ratios
for US stocks in an environment that may be more risky on a global basis (It could be argued that
risks are no higher than they were months ago, but that many players, smitten with the idea of
sustaining high valuations because inflation is so low, have taken off their blinders and have
broadened their focus).

As it stands now, I would be very reluctant to deny another up leg which carries the SPX to new
historic highs. On the face of it, such a continuation of the bull would seem to be modest in
potential. With accomodative monetary policy nearly global in scope now, and with China
especially set to push hard for faster economic growth, US stocks may get strong competition
from foreign markets, oil and other commodities. One offset could be if bondholders, seeing
that the Fed intends to raise short rates gradually but with persistence, elect to trim long dated
maturities and move some of these very large funds into equities.

China -- Stock Market Profile

To benchmark the China stock market, I use the S&P China SPDR (GXC) ETF based on the
S&P BMI China Index. The GXC holds over 600 stocks ranging from major cap. size to small.
The CXC has roughly $6.00 in net per share and trades around 11x eps. It is much less volatile
than the more notorious Shanghai Composite. GXC Daily 

Since its inception in early 2007 at a price of $50, earnings for the GXC have grown nearly 15%
per annum. Corporate profit growth in China has slowed down in the wake of the large 2009 -
2010 fiscal stimulus program and the p/e ratio for the GXC has naturally eroded. With China
struggling to meet its 7% per year growth target, the growth of earnings for the GXC in the
future will continue to be more moderate than in prior years. I would rate the stock as reasonably
priced at $65 (The stock is currently $69+).

The GXC caught the speculative fever for China stocks which began to ramp up around mid - 2014.
GXC shot up from the $70 area to close to $100 this year, but has retreated back to the $70 level
in the recent big China sell - off.

It is foolish to think China can become a broadly diverse, stable consumer led economy so soon
in its development. That has to be a long term objective to be worked at. In the meantime, to
stabilize growth, China has devalued the Yuan, is cutting interest rates and bank reserve requirements,
and is accelerating the growth of its basic money supply. The China economy is in deflation and
the PBOC is having to take stronger action to reverse economic growth deceleration. With more
monetary and fiscal support ahead, the GXC is probably fairly near to sold out.

The bottom panel shows the relative strength of the Shanghai to the  GXC. In my view the Shanghai
would probably be reasonably  priced against the GXC at a little below 40x or about 2700. Since
the Shanghai can be very flighty, the 2700 level has to be taken as a very approximate approximation.

Rome was not built in a day and neither will China be.

Stock Market -- Risky Business

I have been cautious on the stock market since the latter stages of the huge Fed QE program.
Historically, programs like this represent sustained emergency easing and they are very supportive
of investor and private sector confidence. There have been few of them, but when they terminate,
the absence of the strong tail wind they provide to the economy and the markets can susbstantially
diminish confidence. In the absence of large QE, the economy must transition to a credit driven
recovery / expansion and away from one that is liquidity driven, and so must a stock bull market if
it is to survive.

US economic growth has again slowed down over the past year, but consumer, business and banker
confidence has remained relatively solid. Profits have contracted  moderately on low sales volume
growth and pricing power and have taken a large hit from weaker oil and gas prices with lower
costs for net energy consumers only partially offsetting resource provider bottom line erosion.

The stock market had been using the idea that low inflation and interest rates reduce the equity
investment hurdle rate which should entitle investors to enjoy a higher p/e ratio on earnings. In
fact, the vast proportion of the advance in the in the stock market since the autumn of 2011
reflects the progressive rise of the p/e ratio.

My view on the stock market has been that primary and secondary fundamentals, while they have
eroded, are still positive, but that the termination of the powerful liquidity tailwind from QE 3
reduces positive return potential and raises risk.

I am not smart enough to explain exactly why the market has been so shaky since China cut its
dollar peg shortly back, but I suspect that without the big US liquidity tailwind, investor confidence
is more vulnerable to contrary economic developments. Even so, I have been surprised by the
powerful wave of selling.

The SPX is wildly oversold, and because the economy is muddling along positively, I must say
something I may very probably regret, but this kind of panicky action looks crazy, stupid to me.
SPX Daily

SPX -- Daily Chart

I have been cautious on the outlook for the stock market since  the roll up stage of QE 3 last
autumn and have argued this year that the bull market was on tenuous grounds from both
fundamental and technical perspectives. The key directional fundamentals in toto remain
positive but have been deteriorating up until recently when there has been slight improvement.
But, I cannot take any credit for the sudden, sharp selloff so far this week. Even though the SPX
is pricy and many solid observers are looking for a sharp price correction, the basic fundamental
framework for stocks has yet to turn negative. So, a tip of the hat to the other guys. SPX Daily

The SPX has entered a short term downtrend. 2015 price support has been has been taken out,
the 25 day m/a is rolling over and RSI and MACD, which have both been trending down, are
weak. The SPX is moderately oversold at a 2.8% discount to the 25 day m/a with RSI also
approaching an oversold position. So, it will prove instructive presently to see how much fire
power the bears are carrying since there is a moderate short term oversold condition in place.

SPX -- Weekly

Fundamentals & Valuation
Core fundamentals remain positive, but continue to erode. The slippage in the growth of monetary
liquidity continues but at a milder pace and there has been no liftoff yet in short rates. Secondary
fundamentals have slipped slightly but remain in plus territory. Shorter term leading economic
indicators, which turned up in Mar., are moderately positive on balance.

SPX  net per share is running at an annualized rate of $112 compared to $102 for mid - 2011. Thus,
most all of the large gains in the market since the autumn lows of 2011 reflect a sizable increase in
the p/e ratio. Players have slashed the market's discount or hurdle rate to reflect a sharp deceleration
of inflation and a continuation of the Fed's ZIRP just as they did beginning in the 1960's when the
inflation rate began to factor more prominently in market valuation measures (By this token, if
there is faster economic and profits growth ahead, gains in the SPX price level may be subdued if
inflation accelerates and investors elect to scale back the p/e of the market accordingly). The
prospect of faster inflation likely bothers few players now as with excess global production
capacity and slow demand growth, investors are more concerned about mild deflation tendencies.

Technical
The indicators with the weekly SPX chart show that momentum last hit a peak at the end of 2013.
The market has advanced since then, but momentum readings have persistently eroded and by
extension suggest the SPX will end up 2015 on the flat side. That is not a forecast, but it is where
we will end up without a substantial positive or negative change to investor psychology. SPX weekly

Afterthought
I have not abandoned the idea that global economic growth will strengthen as the year progresses.
If the global economy does improve, the Fed would likely abandon its ZIRP, commodities prices
would rise some, the dollar would weaken and the SPX could get competition from commodities,
PMs and selected foreign equities markets. Interestingly, China, which has been exporting
deflation for a good several years because of slowing growth and sizable idle capacity, has again
turned more sharply expansive with monetary policy and a change in Its currency value regimen
toward a weaker yuan.

Stock Market Sentiment

In measuring market sentiment, I prefer to watch the equities put / call ratio simply because
it reflects real money down on the table and not advisory opinion where many of those polled
may have no 'skin in the game'. $CPCE Dailyhttp://stockcharts.com/h-sc/ui?s=%24CPCE&p=D&yr=5&mn=0&dy=0&id=p62224920975

I use the put / call as an inverse indicator which becomes interesting at extreme levels. The current
chart shows a recent very sharp rise in the put / call ratio as players have become rapidly more
bearish on the outlook for stocks based on the 30 day m/a. I classify the stock market as oversold
when the 30 day p / c ratio rises above .70. This measure may obviously go higher particularly if
the market weakens in the short run, but note that a .70 plus has often signified that a positve
price reversal lies not too far ahead.

Stock Market

The Fed began to tighten policy last autumn with the close out of QE 3. Now, there is intense
speculation the Fed will begin the next step in the tightening process with an initial increase to
short rates as soon as its Sep. meeting. The Fed is promising that once it begins the process of
raising rates, It will do so in a gradual fashion. Since all players know It is likely to raise rates a
couple of times at the least, investors are assessing how even a gradual and gentle process will
affect not just the economy but their rate of return assumptions as well. So, there are questions,
and when there are, it is normal to expect some trepidation in the market until one can get a
fuller sense of how the Fed is planning to proceed with the process. The market has been on the
flat side this year with intermittent quiet bouts of profit taking along with short and rather shallow
rallies. The market has been discounting the event of a change to a further tightening of policy
and I sure do not know whether the discounting process is just winding up or whether it will
proceed further until the event is at last upon us. Assurances from the Fed that short rates are
likely to remain low for a good while may have a countering force in the elevated p/e ratio
which has given little ground since earlier in the year.


Daily SPX

Commodities Market

Statistically, the CRB Commodities Index is dirt cheap on an historical basis. The index is now
just slightly north of 200. Since the early 1970s, 180 - 200 on the index has marked the bottoms
on the chart. Years back, I developed a macro model to figure out an equilibrium price where
supply and demand for commodities are in reasonable balance and where  the price includes
enough  profit margin sufficient to encourage future supply to grow along with demand. Here in
2015 the fair value price is running around 350 on the index. $CRB Chart

the CRB is trading at a large discount to fair value. This suggests a goodly number of raw
commodities producers are now running in the red and can only be cash flow positive if
there are sizable depreciation and depletion allowances and / or paid - in subsidies to keep
people employed (a not uncommon practice in foreign economies). Big discounts to fair
value in the commodities markets usually occur during recession periods such as in late 2001
and 2008 - 09. Now, we have a different situation. Global demand is growing at about half
the rate it needs to grow to allow depressed operating rates to rise enough to equilibrate the
markets. The 2002 - 2008 boom in commodities prices brought along with it a large cycle of
commodities capacity expansion. Moreover, with global monetary policy accomodative
since 2009, producers have been reluctant to shut - in capacity. The problem of excess capacity
relative to demand has been clearly apparent since early 2012. On top of too much capacity in
the business, we have to add the unwinding of long positions built up in commodities by both
financial players and speculators. Long futures positions in the markets often reached 3 times
what they were at the beginning of the last boom in 2002.

Viewed over the last 40 odd years, the CRB index is sold out and in distress given rising
operating costs and notwithstanding large productivity gains. The timing of price recovery
for commodities, as cheap as they are, is hard to figure. More of the marginal producers
and more of the diehard speculators may have to be stripped out of the equation. The low
global demand growth has yet to show much acceleration and a strong US $ is also a drag
on the market. Thus, a decline in the CRB index down to the 180 level cannot be ruled before
there is improvement.

Commodities are on my watch list and I may try long positions in the DBC commodities
tracking ETF (bottom panel of chart above) when it looks like a short run uptrend may be
developing.

Oil Price

Oil is about to move into a seasonally strong period which normally lasts through the end of
Sep. - beginning of Oct. Such periods can be exciting but do not normally top the Mar. - Apr.
interval for lift off power. The onset of a seasonally strong period does not look like a happy
moment on the chart. WTIC Weekly

The oil price held up very well through the normally weak late spring - early summer period,
but has broken down sharply since. The Iran nuke deal has been a negative, as has a bit of
firming in the US rig count, fresh debate over the prospective size of the of excess capacity at
the wellhead, and a general decline in commodities. The bear market in oil was re-affirmed
when the price recently failed to break above  its 40 wk. m/a. An oversold condition is
developing with important shorter term support at $45 WTIC.

I had been guessing back in the spring that oil could, after the oncoming bout of seasonal weak-
ness, rise to $70 bl. in the early autumn of this year, but that now looks like quite a stretch and
would likely require not yet apparent extra factors to come into play beyond the seasonal lift.

SPX -- Weekly

Technical
The SPX bounced nicely last week to close very slightly below its all time high. Moreover, it
remained clear of the 40 wk. m/a on the plus side. SPX Weekly

The cyclical bull market has grown more tenuous, however. The SPX is no longer following a
clear uptrend line and has steadily lost momentum. It has been making new highs, but they
have been so minor that the market has basically been adrift. Moreover, the breadth of the market,
measured by the percentage of stocks in clear positive momentum price patterns, is sharply
lower than at the start of the year.

The SPX is not not materially overbought against its 40 wk. m/a and has not been so for months.
the 40 wk is also still progressing higher, although it is starting to flatten out compared to the
prior year.

In all, the chart is unimpressive but is not yet near negative, and on the old saw that one should
never sell a dull market, players have just been going along with it even though the SPX has
been drifting.

Fundamental
On balance, the fundamentals are positive, but the situation on this score is tenuous as well.
Broadly, resources are in place to support continuation of real progress in the economy through
2016 in my view, but the progress we are witnessing is quite modest. Measured yr/ yr my
coincident economic indicator has declined from a healthy 3% at the outset of 2015 to an
anemic  1.6% through June. My monthly and weekly leading economic indicators signal a pick up
in growth for  Half 2 '15, but the readings are, shall we say, unprepossessing. SPX net per share
continues to trail the prior year, with weakness in the energy sector more than offsetting gains
elsewhere. Even excluding oil and gas, pricing power is modest, and many companies are
experiencing lower productivity growth since business is now geared for faster volume gains
which have yet to materialize.

There is an investor patience factor at work here as well. The market p/e ratio is elevated.
But with cash yielding near zero and bond market yields drifting higher, many players appear
reconciled for now to hold  equities portfolios to pick up the 2.1% yield and to play the
share buyback and merger lotteries as well as chase positive earnings surprise (viz. Netflix
and Google shares).









 

Gold Price

The gold price appeared to have a broken a down trend running back to 2012 earlier this year.
The Jan. rally was better than I expected, but it was unable to hold.  Gold Price Daily

As the year has progressed, gold has been unable to rally from $1200 oz. support as it did
at the outset of 2015, and support at $1200 has recently turned into resistance. I reckon that
at around $1145, gold is now trading a little below the all-in cost of production for a fair
portion of the mining group with any number of mines now cash flow positive only because
of depreciation / depletion considerations. The gold price is now mildly oversold and a minor
bounce may be in the cards.

Global industrial output has been growing only at around 2% in recent years and this has
not been fast enough to put any real substantial upward pressure on factory operating rates.
Consequently, global inflation pressure has trended down to modest levels. Moreover, the
recent blowout of the oil price reflecting a supply glut has been a sore spot for gold players,
since in modern times, strong run-ups in the price of oil have tended to be a very substantial
factor in leading periods of accelerating inflation.

I have been looking for faster economic growth over the second half of 2015 and have thought
this might trigger some positive price action in the gold market. However, global liquidity
growth going into Half 2 '15 has continued restrained especially in the US and China, and the
economic benefits to both countries have been more muted so far than I expected. Thus, for the
present, global output continues to grow but not yet fast enough to signal that capacity
utilization is about to swing higher on a cyclical basis.

The gold price is volatile enough that you do not have to catch the bottom tick to make good
money on the long side. Faster industrial output growth should trigger a decent gold rally, but
you have to hover over the output data as it comes in because the liquidity support for the
global economy is restrained enough that you cannot be sure yet whether the pop in global
output will come soon.

Iran & Nukes

It is high time the US wraps up the talks with the Iran on the latter's nuclear development program.
Iran gets the lion's share of media attention in the propaganda wars with all the "Death to America"
talk. What is less well known is the existence of deep set contempt for Iran here. So, if the
US closes out the talks with Iran without an agreement, there may be some nasty politicizing
here, but it will pass soon enough. Obama has only 18 months left to his term, and in my opinon
he can better spend that time on other matters if the US does not get the strong deal it needs
from Iran right quick. I bring this matter up because I think the political goodwill that has allowed
these talks to continue under the radar for many months is about to run out, thus creating some
concession pressure in Iran's favor that will be received very poorly in the US and could damage
Obama's standing if goodies to Iran creep into an agreement.

With an agreement on the Iran nuclear program and an early end to sanctions, it is estimated
that Iran could ramp up oil production to 1 million bd within one year after the sanction
covering oil is lifted. In a world with excess oil supply at present, that is worth noting as such a
development may not be fully discounted in the market. If there is no deal, Lord knows
what will happen to Iranian output as it is very difficult to say what the standing of the
sanctions program will look like given the number of parties represented at the talks as well
as those hovering close on the sidelines.

SPX

Fundamentals
My primary fundamentals are all trending negative, save for short term interest rates. On the
wise premise that you should not signal "buy" or "sell" until the indicators say so, the "easy
money" buy signal, as frayed as it is, still does not signal it is time to significantly reduce
equity exposure. Though there is no "sell" in place, market risk is elevated because history
shows the SPX does not perform well during periods following the the termination of very
large bouts of quantitative easing such as occurred this past autumn.

My secondary indicators are, on balance, positive. For openers, there is excess liquidity in the
system relative to the current needs of the real economy, which now features modest real growth
and minimal inflation. As well, there is a steep positive slope to the yield curve (30 yr Treas. % -
3mo. Bill Yield). This shows no real pressure on the economy from the Fed. In like manner,
short term rates are way below my measure of economic momentum measured yr/yr. Too, my
business profits leading indicators have turned modestly positve in recent months. Finally, the
price of oil is not in a rapid uptrend, which can destabilize the economy.

More broadly, there is still slack in the US economy and no danger of immediate overheating.
In my mind, that leaves the odds favorable for a another cyclical up leg for this market, with
timing of origination far from clear as the market may have to get past increases to short rates
first.

Technical
The momentum of the SPX since last autumn when QE 3 ended has fizzled out.  SPX Daily
The SPX has actually entered a short term corrective phase and is mildly oversold against its
25 day m/a. As well, it is sitting on its 200 day m/a which itself is flattening. The key short run
RSI and MACD indicators are also down trending, and the VIX volatility (fear) index is
approaching a short term oversold. There is not a classical sharp short term oversold in place
now, but the market is approaching it. The SPX has drifted off the uptrend lines in place
dating back to late 2011, and is now still nearly 3% above linear support at 2000. Not Quite
out of the woods yet.

Sweet Jesus : Greece And China

Greece
The ECB, as lender of last resort, opted today to continue its emergency liquidity assistance to
to the beleagured Hellenic Republic to support minimal commerce. With a "no" vote on pro -
austerity bailout programs from the 'Troika' by Greek citizens, The Greek PM deftly outflanked
Teutonic rectitude and forced the EZ players to either blow off Greece and put the country much
further along toward formal default on its $540 billion debt or to sit down with Greek negotiators
to hammer out a new deal which would swap some level of debt forgiveness for additional
austerity. The Greek people are strongly behind the Tsiparis regime, and major non- euro
power centers will not take kindly to seeing the disintegration of Greek society. If Mrs. Merkel
and the eurocrats in Brussels cannot conjure up a marketable story that Greece is truly a unique
case in desperate need of loan forgiveness and beneficence, they are truly worthless as politicians.
Merkel is inviting a veritable shit storm of criticism from both official sources and social media
if  she cuts Greece loose in its time of need. If the European Union wishes to dump Greece
forthwith, load the Greek wagon with debt forgiveness and sufficient liquidity to help them have
a fighting chance to begin to restore their economy. Germany has a chance to create a decent 'final
solution' this time out.

China
Party officials are in panic mode to prop up the Shanghai as it crashes. I have no idea whether
they will succeed, but since so many retail investors have been sucked in by the recent run -
up in the market, they must be concerned that social unrest could be out ahead and that what's
left of the more conservative old guard could drum up support for a counterstrike against
leadership that is seen as moving too quickly to alter the economic order.

My view for months has been the Shanghai should trade around 2800, and it is quite something
to my tired eyes to see the Gov. in there trying to hold the market up at such an overpriced level.
Daily Shanghai  (Note, however, that a short term oversold has developed).

SPX -- Monthly

The argument here since last autumn has been that the end of the huge Fed QE 3 tailwind to
the economy  and the stock market would involve  penalties for both. So far, resulting economic
and market difficulties have not been major. The US economy slowed down as expected, and
deceleration of progress was made worse by severe winter weather and labor difficulty work
stoppages. With the Fed having frozen its balance sheet, financial system monetary liquidity  
growth is slowing markedly,  and the economy is becoming far more reliant on internally
generated cash flows and private sector credit growth to fund further progress. Transitions of
this sort have occurred frequently and successfully throughout US history but they can be very
difficult during those times when the economy and confidence have been heavily dependent on
large liquidity support. In turn, the SPX has lost its positive momentum and is trading on a par
with its highs seen last Nov.

My weekly leading economic indicators have recovered and suggest a mild rebound for the
economy during the second half of 2015. When measured yr/yr, business sales and earnings
should also improve modestly. As for the stock market, my "easy money buy signal", in
force since very early 2009, will likely end late in 2015 if the Fed starts to raise short term
rates as is now widely expected.

Speaking as a funds manager and not a retiree, when the "easy money buy" comes to an end,
it would be time for me to acknowledge increased cyclical fundamental risk and reduce exposure
to stocks.

No buy signal does not imply a market top but it does say to me that it is time to
activate strategy and tactics to reduce exposure to stocks because the secondary indicators I
use during these periods are far less reliable than the primary ones and because fundamental
risk will likely rise further. I should note that a goodly number of fund managers would not
agree with this approach, finding it too conservative.

I have added a link for the SPX Monthly Chart. It shows the SPX to be down on its 10 month
m/a, RSI and price momentum in downtrends, and most disquieting, a roll over to the down-
side for MACD. It may be too early to consider that roll - down in MACD a kiss of death.
The reason is that  the economic expansion does not yet exhibit the maturity in terms of
resource and capital utilization that would prompt such a perspective.

More On China Stocks -- Shanghai

First up, let's look at the monthly Shanghai for the longer run dating back to the mid - 1990s.
Shanghai Composite

In 1995, the Shanghai was in the area of 700. If you figure a 10% annual compound return, that
works out to about 4700 currently, which is just where the Shanghai is sitting. The issue here is that
China is no longer logging 10% growth and is struggling to achieve 7% annual growth. With a
forward look, the base at 4700 is too high for an economy with a pronounced decelerating growth
trend. The index has a large component of pure speculative interest.

Note also that the monthly RSI shows an overbought reading nearly right up there with the
bubble top of 2007. Now since China's book profits have grown significantly since then, the
p/e ratio on the market is considerably lower now than back during the bubble top, but even
so, this is not a cheap market as it was in mid - 2014 at the 2000 level. Note also that the very
high RSI readings up near 80 or above since the mid - '90s have served as good warning lights.

Now comes the weekly chart for the Shanghai. $SSEC The top panel of the chart compares the
Shanghai with the S&P SPDR index ETF for China. There is not a long history here, but the
$SSEC has tended to top out in relative strength against the GXC in the 50 - 55 area (the last
time was 2007).

China has a long history of domestic turmoil and is the graveyard of prognosticators. Apropos,
the US State Dep't and the CIA keep their fingers crossed for stability and hope for the best.
Now, with Mr. Xi trying to shift gears on economic and financial policy, China is going into one
of those times when its "social contract" -- its citizens tolerate  the the Party in exchange for
continuing prosperity -- may be tested for one of the few times in the past 35 years.

China Stock Market

I made a nice call on China stocks in Jun. 2014. The key premise was that a slowing economy
would lead the PBOC to ease monetary policy and re-liquify the system. I believe that longer
term, the Chinese have preferred to invest and speculate in real estate, and that the destruction
of the China stock bubble going into the 2008 - 2009 global recession only served to reinforce
the preference for real property. The weakness in the residential real estate market over the
past year was partly a result of tougher policy by official China in the real estate area, so when
China began to ease monetary policy in late 2014 and encourage equity investment, the change
in policies left real estate to languish and invited speculative spirits back into equities. This
was a pleasant surprise for the equity market since monetary policy has not been strongly
accomodative at all by China standards. So, net - net, mild easing plus changes in official policy
has lead to a windfall for stock players. GXC (With The Shanghai in the top panel).

It is interesting that the PBOC's change to ease has been moderate and controlled, for it is
likely not strong enough to trigger heavy speculative lending to business and real estate as
seen in the past. In this regard, since the new easier money policy has been slow to roll out,
improvement in China economic performance has been deferred until Half 2, 2015.

Over the years I have mentioned  that when The Shanghai is strong, the action can get wild
and undisciplined. The chart above, which features the S&P ETF of a broad index of investment
grade equities (GXC), looks tame in performance compared to the wild and wooly Shanghai
shown in the top panel of the chart. With the GXC there has been a  major tradeoff of volatility for
positive return against the Shanghai in a strongly positve market environment.

The GXC has been in bull mode since late 2011 and its pattern more resembles the SPX than the
Shanghai. The recent jump in price to $100 for the GXC brought it closer to its all - time high
of 113 set in the bubble high of late 2007. The stock has been correcting, but it remains mildly
extended and overbought. Earnings have progressed over the last seven years, so the stock is
much cheaper than it was at the peak in 2007.

It is good that China has embarked on controlled money and credit easing, and that from a
policy point of view, it is trying to encourage a larger, more liquid equities market. China has
also curbed its mercantilist impulse and seeks to diversify its economy away from excessive
emphasis on industrial development. I am hopeful that with slower growth the populace
can adjust its expectations calmly and will not require the authorities in Beijing to sop up
anger with nationalism and a round of regional imperialism.

SPX -- Daily

It was mentioned in a 6/10 post on the SPX that since the market held the shorter term shelf
of support at 2080, it might be worthwhile to see how it performed given widespread bearish
sentiment on both technical and fundamental grounds. The SPX has rallied enough off of
2080 support to turn the 25 day m/a positive, so it continues to require added attention given
the surprise move relative to sentiment. SPX

Key indicators of SPX behavior continue to show decelerating price momentum and recent
rallies that have tended to sputter out in mildly fitful fashion. Many strategists and other close
observers believe it is high time for a healthy correction. May be so, but it is also clear that
there exists a steadfast cadre of players who argue that the economy is progressing, that
weakness in SPX net per share is but temporary, and that a premium p/e ratio is well warranted
given prospects for a continuation of an extended period of low inflation and interest rates.
Newer players to the game may not be aware of the sway that this thesis of support for higher
and rising p/e ratios held in the market of the 1960s and very early 1970s. The view is often
encapsulated by the "Rule of 20", which claims that SPX p/e = 20 - the 12 month inflation
rate. With inflation very low and interests rates non - threatening, players who support this
idea see the market as reasonably priced.

I have issues with the "Rule of 20". Mostly, I am concerned that the rule should be based on
a longer view of inflation potential where there is considerably more room for debate than with
short run inflation measures.

Just know now that the "Rule of 20" is in vogue currently and has yet to be defeated by the
facts on the ground.

US Monetary Policy

Short Term Interest Rates
The classical cyclical economic case for raising short rates has weakened since latter 2014
with a more sluggish economy and awaits a return to stronger economic growth. Market rates
at the very short end of the curve are near record lows and support the Fed's ZIRP. With the
economy in its sixth year of recovery, capital slack in the system has been greatly reduced,
but there are presently no compelling imbalances in  resource utilization. The Fed has time
to watch for an improved economy before taking action.

Fed Generated Liquidity
The tapering and close out processes for QE 3 have adversely affected economic growth
and stock market progress in 2015. Since the Fed has not acknowledged these developments,
it is hard to say how aware policymakers are of the connection. I suspect it has been discussed
within the Fed and has made a few members of the FOMC more cautious about raising rates.

 The Fed has let over $35 bil. of assets run off Its books in recent months. This may have
bothered Treasury and stock market players some, and the Fed may allow some further modest
run - off. However, since seasonal system liquidity needs will firm up after the summer, it
may well be that the Fed will add back as much as $50 bil. to its book by this autumn. If so,
the markets may like that.

SPX -- Daily

The SPX rallied sharply today off 2080 shorter term resistance. Since so many players have
recently been looking for a price correction of substance, it might be wise to see how this
bounce plays out over the next few days. SPX

The key to extending the pop in the SPX is whether the market can break above the 25 day
m/a followed by enough forward power to turn the "25" higher. Such action would no doubt
change a few minds among the consensus that the market should erode further to test
support at the Mar. low of SPX 2040.

Note however, that the rallies so far this year have been losing momentum.

Long Treasury Bond

I turned bearish on the long -T around mid - Feb. of this year largely on technical grounds.
The TLT was above 130 at the time and very overbought. It is now at about 117.5 and the
overbought has vanished. TLT

The fundamentals I use to get a good sense of direction for the bond market have eroded only
slightly and current data are insufficient to signal a clear bearish reversal. I conclude that not
only was the market overbought earlier in the year, but that weakness in TLT likely also
reflects expectations that future inflation will strengthen and that the Fed has it strongly in
mind to raise benchmark short term interest rates over the next six to nine months. The sharp
weakness in the TLT price seen since Feb. of 2015 may also involve trader worry over liquidity
in the market once it becomes more apparent the Fed is finally getting ready to pull the trigger
on rates.

From mid - 2012 through late 2013, TLT fell in price from above 120 down to the 97 - 98
area all on expectations that the Fed would end QE 3 and raise short rates. Bond pricing
fundamentals remained positive over this entire period, and when traders realized their fears
were not going to be realized, they took the bond up from the high 90s to above 135 early
this year. The moral here is that we need to say a sustainable step in economic growth
with enough momentum to bring additional pricing pressure and firmer credit demand before
it can be stated with confidence that T - bond price fundamentals have made a decisive
cyclical turn for the worse.

US Economy -- At Fail Safe Point

Over 100 years of monetary, economic and stock market data show conclusively that when
the monetary base adjusted for inflation flattens out or declines for an extended period, bad
things happen to the economy and the stock market. The time between the end of growth of
the base and trouble varies considerably with the key variables being the strength of private
sector credit supply and demand. When the Fed has tightened up on liquidity, the economy
and the stock market can continue to flourish so long as borrowers can avail themselves of
ample credit.

When the Fed made it clear it was ending the very  large QE 3 program after the tapering
process, I argued that there would be an economic slowdown that carried well into 2015 and
that the prospects for the economy would largely depend on confident borrowers and lenders.
The unfolding economic slowdown witnessed since late 2014 has been made worse by bad
winter weather, a large decline in drilling for oil during an emerging supply glut and a couple
of other very transitory factors.

The slowing of sales and production growth this year has reached an economic fail safe point
in that further weakness may well invite economic recession. In short, the economy needs to
do better soon and it is unwise not to follow its direction very carefully going forward lest you
get caught with excess risk exposure. The adjusted monetary base has been flat since Aug. 2014.
The Fed has held short rates at the zero bound level, but It has tightened liquidity and policy
very appreciably.

So, before we worry about when and by how much the Fed may raise rates, we need to make
sure the economy is not about to dip into a downturn. The weekly leading economic indicator
I use has been improving since the end of Mar. this year, and this suggests we should see
some improvement in business sales and production come Jun. Moreover, the banking sector
has ample liquidity to underwrite rising credit demand in support of economic growth going
forward. Even so, be from Missouri on this one (Show me the growth).

----------------------------------------------------------------------------------------------------------------
The Philadelphia Fed leading economic index has fallen to 1%. There have been periods in
the past when the index has fallen below 1% but has subsequently recovered, leaving the
economy to grow further but note when the index has not recouped. Leading Indicator

SPX Weekly -- Cliffhanger

Technical
The SPX remains in a cyclical bull dating back to early 2009. However, progress of the strong
leg up from autumn, 2011 has grown more halting. After reaching a dramatic overbought on the
weekly chart near mid - 2014, the momentum of the SPX has deteriorated gracefully but per-
sistently, and now has now slowed to a crawl. SPX Weekly

Very supportive uptrend lines dating back to the fall of 2011 and Oct. 2014 have been violated
and although the market has not been overbought for months, it has become very tightly range
bound and gives the appearance of being "toppy". There are a growing number of good quality
technicians and strategists who are concerned the SPX is moving toward an intermediate term
breakdown. The persistency of the erosion in price momentum mitigates against an imminent
negative turn but can easily lead one to conclude that a negative adjustment is immanent and
perhaps not that far off in time.

Fundamental
Not all the bulls have the same perspective, and there is a goodly cluster of players who think
the market can "thread the needle" and eventually develop an additional leg up without having
a nasty or deep price correction. The case they represent has it that the economy will regain
positive traction and that any cyclical acceleration of inflation will be mild enough to lead the
Federal Reserve to boost short rates in a way that is spaced out enough and slow enough
as to not substantially undercut the SPX p/e ratio as profits recover positive momentum. They
see the Fed as being in "fine tuning" mode with the FOMC desiring to gradually restore
monetary policy toward more normal footing without triggering off a disruptive stampede out
of fixed income securities. Moreover, the guys know 2016 is a national election year and
may be figuring, wisely I think, that the Fed may desire to avoid calling too much attention to
Itself next year.

This sort of fancy reasoning tends to come along in the latter stages of a bull market and is
often quite beguiling. It also helps explain why the market has not sold off sharply already in
anticipation of further credit tightening, and highlights the need many players have to see first
whether the economy can regain sufficient momentum to trigger off Fed tightening alarm bells.

How's that for tap dancing around an issue?

Stock Market -- SPX

The powerful 20% annual price momentum that drove the market higher from late 2011 until
well into 2014 has dissipated. The very large QE program of the Fed ended in the autumn of
last year. As expected, my proxy for business sales growth has declined from 7.1% y/y at 7/'14
down to about 1.5% y/y through April. S&P 500 net per share has rolled over to the downside.
The erosion of sales and earnings fundamentals reflects falling system liquidity growth that
preceded it coupled with bad winter weather and a sharp fall in oil and gas prices.

Comparatively, the SPX has been advancing at a modest 6% annual pace since very late 2014.
Erosion of US business has taken a heavy toll on the market's progress but has yet to break it.
The p/e ratio on 12 mos. net per share through Q 1 '15 is a hefty 19x. Plainly, investors expect
better times ahead.

My core fundamentals have been slipping, but may well not turn out to hit an "end of easy
money" sell signal until late this year or early 2016. The "easy money" buy signal has been
in place since early 2009, but it has not protected investors and traders from some sharp
sell - offs as occurred in 2010, 2011, and 2012 when QE programs tailed off temporarily.
Now, we see not only eroding liquidity growth but humble business performance as well.
I expect to see some bounce back in the business environment, and my weekly leading
economic indicator has been improving since early March this year. However, it still remains
to be seen whether private sector liquidity growth can remain strong enough to support business
confidence now that the Fed has frozen its balance sheet.

The elevated p/e multiple has been supported by zero bound short term interest rates and
the pronounced deceleration of inflation of recent years. If business does pick up as now
indicated, inflation pressure may intensify and the Fed will then have to confront the decision
of when to raise short term rates. Given how poorly the economy has behaved since the end
of QE 3, the Fed may want to give the issue of raising short rates considerable thought before
it proceeds. Even if the tone of business and consumer confidence remains satisfactory in the
wake of a hike in short rates, investors may well still face a challenge to the logic of such
an elevated p/e.

SPX Daily

Long Treasury Bond

In a Feb. 11, '15 post I argued the long Treasury was too pricey. The TLT ishares 20 yr T
had experienced a nearly parabolic price rise and had moved up to a gaping premium over
its 200 day m/a. I viewed a price of 105 (3.5% yield) as more sensible given how inflation
can fluctuate over the longer run.

the long T price has been in corrective mode since the early part of Feb. of this year and is
now clearly oversold for the short term. TLT shares have actually dropped to a slight discount
to the 200 day m/a for the first time since late 2013 and there may be some shorter term price
support in the $115 - 120 area.

The weakness in TLT for much of this year reflects not only the correction from a glaring
overbought condition but some mild erosion of price direction fundamentals, most notably
a minor bounce in sensitive materials prices paced by a partial recovery in the crude price.
The Fed is holding to its ZIRP, but market players have grown concerned that the central
bank may abandon its policy and push up short rates later in the year. Bond traders are also
starting to worry about liquidity in the market if higher short rates and inflation lead to a rush
for the exits (In the spring of 2013, TLT dropped relatively quickly from the 116 level down
below 100 during the ensuing months).

I need to see quite a bit more of how economic performance unfolds this year before I would
consider a long side Treasury trade, and even then would probably want to wait to see if TLT
can make it back under 105.

Inflation Expectation Quickie

A fast way to measure inflation expectations in the US is to look at the strength of the
commodities market (CRB Index) relative to the price of the 30 year Treasury ($USB).
Initial inflation momentum usually starts in the commodities pits and is often picked up
down the road via a weaker Treasury market. $CRB / $USB

A relative strength index of 2.8x would be a conservative measure of long term equilibrium.
With the current reading at a depressed 1.48x, it is easy to see how heavily wrung out the
inflation anticipation is in the markets and how large a correction favoring commodites
could come with an acceleration of global economic growth. Something to keep in mind
as watch to see whether US economic growth is set to rebound and whether global growth
will gain further increased traction.

Oil Price

The oil price has maintained its rally since mid - March. The rotary rig count is now down 50%
y/y and speculation that large excess US crude supply might end before long has continued to
strengthen. The oil business has now entered a period of mild seasonal weakness following the
strong initial driving season gasoline build. Long side players are now without the strong
seasonal and now have an oil price that is registering the first overbought reading since prior
to the crash. $WTIC

It is interesting that the oil price at $60WTI is fast approaching the bottom of the long term uptrend   
channel dating back to the late 1990s. With oil now overbought, some players may look extra
carefully to see if the bottom boundary (now $62 bl.) might serve as new resistance or treat it as
a non - issue in the expectation that oil is returning to its long term wide uptrend range.

My guess has been that oil could reach $70 at the end of Sep. '15 as a seasonal peak on improved
demand. It is still very much a guess too, since my expectation that global economic demand
would firm up as 2015 progressed has yet to be confirmed.

The shale oil business allows drillers to re-start drilling and production in comparatively short
order. Thus, with the oil price now much higher now than at the bottom of the crash, traders need
to stay vigilant for that day out there in time when the rig count stabilizes and then begins to
recover as these events may act as a drag on the oil price.

Stock Market -- Traders Lean Bearish

Despite media chatter about traders being too bullish on stocks, evidence from players who
back their judgment concerning the shorter term outlook for the market with real money down
have gradually turned less bullish since the end of 2013 and as a group are currently turning
mildly bearish. Consider the equities only put / call ratio. $CPCE

The chart's focus is the CPCE 13 wk. m/a. Low put / call readings down around .55 signal strong
optimism. The last time we saw this was back at the end of 2013 when The SPX was hitting very
strong y/y price momentum. Since then, the 13 wk. the p / c ratio has trended higher and has
recently crossed over into mildly bearish territory. More extreme trader bearishness is signaled
up around a .75 p /c reading as last seen during the latter part of 2011.

The gradual rise in the intermediate term put / call ratio reflects the progressive decline of price
momentum for the SPX since the end of 2013 and signals increasing caution in shorter term
market sentiment despite recent highs for the SPX.

Monetary Policy -- The Fed Abides...

Zero Bound Short Term Rates
The case for increasing short term rates has eroded since the latter part of 2014. My ISM
composite for new orders has declined from a powerful 65.9 last Aug. to a more moderate
54.7. US capacity Utilization % has declined from the 79 - 80% area to 78.4 % more
recently. My short term supply / credit demand indicator dropped from  a moderate +6.1 in
favor of demand down to +5.2. Since mid- 2014, the CPI measured y/y has decelerated
from 2% to flat.

Ms. Yellen and key members of the Board plainly want to see faster economic growth,
more intense utilization of resources, and a more normal cyclical acceleration of inflation
pressure before responding with a boost to short rates and Ms. Yellen, at least, desires
assurances that a step up in economic activity has enough staying power to draw some
more of the underemployed and longer term unemployed back into  the workforce on a
regular full time basis.

Financial Liquidity
For months my position has been that the termination of the large QE 3 program would
lead to slower economic and profits growth. Measured y/y, total system liquidity growth,
to include the Fed's balance sheet, has fallen from a very strong 11.1% in early 2014 down
to 5.5% currently. I see that as a sizable loss of tailwind for the economic expansion and
a significant impediment to business profits.

US economic progress has also been retarded by work stoppages on west coast docks, severe
winter weather across the eastern two - thirds of the country, reduced oil and gas drilling
activity and the effects of a strong dollar on US competitiveness.

The Fed may be in no mood to confess to the negative economic potential inherent in
terminating QE 3, but the Board wishes to see how the economy responds as the transitory
seasonal and labor dispute factors finish playing out. Thereafter, we all have to confront
whether the reduced liquidity growth discussed above will continue to hamper economic
growth or whether the private sector will continue to respond positively enough to provide
sufficient liquidity to generate moderate economic progress.

Providing the economy begins to grow more rapidly as this year unfolds, the Fed will be
at liberty to push up short rates periodically rather than steadily.

SPX -- Daily

Since the SPX failed to make a decisive new high today, there is a short term mechanical sell
signal in place which some traders will follow. Perhaps more importantly, the uptrend line for
the SPX will hit 2100 at the end of next week and this will force more traders to decide whether
they want to continue to be in the SPX on the long side or whether there are better spots
elsewhere. The action in the SPX since Oct. '14 is about to be squeezed down to an intolerably
tight range and thus trend in the market will be forced to change for good or ill. SPX Daily
The positive element here is that the SPX is not overbought shorter term and thus has some
room to move up further.

I want to add a fundamental note here as well . March was another miserable weather month
for the eastern two-thirds of the US. For most of Mar., the mean daily temp. in my area of NY
was 18 F. The current month was better, but we had snow flurries yesterday and are a under a
hard freeze warning for this overnight. The point here is that with unseasonable weather,
economic data for Mar. at least may be suppressed again as in Q 1 '15.
 

Global Economic Supply / Demand

In the post Great Global Recession period, worldwide production resource growth has expanded
steadily with little apparent mothballing of plant. Business pricing power overall appears to gain
little or no leverage unless demand grows about 4% y/y. Since the spring of 2014, global demand  
growth in terms of output has slowed from 3.8% y/y to about 3% reflecting growth deceleration
in the advanced economies plus a sharp slowdown in China's industrial output. Nowhere has the
development of excess productive capacity captured investor attention more than the oil output
sector which has seen prices fall by 50%.

The US has ended its quantitative easing program, but has sufficient liquidity to grow its economy
moderately as more seasonal weather returns and the effects of the winter time west coast port
terminal labor difficulties wear off. Moreover, China has stepped up monetary easing substantially
and the EZ and Japan have major QE programs underway. It is not unreasonable then to expect
global output growth to return to the 4% y/y level in real terms and for capacity utilization to
stabilize and recover some as 2015 progresses. This leaves a significant probability that inflation
pressures may re-emerge excluding the oil and gas sectors and that we may also see a hastening of
of a significant, partial re - balancing of supply / demand in the oil sector, too.

SPX - Daily

Today's sell off leaves the SPX at intermediate term trend support of 2080. It ain't over 'til its
over. SPX Daily

Oil Price -- Big Test Ahead

The oil price continues in its first sustained uptrend since the crash. The recent action has seen
WTI crude take out previous highs so far this year, and oil is now headed up to an RSI overbought
for the first time since Jun.2014. The strong positive price action for crude is consistent with a
typical seasonal spurt  over Mar. / Apr. in anticipation of a rise in gasoline demand. If the oil price
follows the conventional seasonal pattern, it will top out shortly and not see sustainable strength
again until the end of Jul. '15. Traders currently long the market need to consider carefully
whether to hold those positions through the early summer. WTIC Daily

SPX -- Daily

The SPX has stayed in an uptrend off the Oct.'14 lows. It has thus been holding trend support,
but has had greater difficulty holding the higher ground on rallies since the end of Mar., with
the resistance line now having moved up to SPX 2100. SPX Daily

It is worth noting that not only is 2100 short term resistance but it has become longer term
overhead as well, as the uptrend line from the late 2011 lows is now sitting a little above 2100.

For the short term then, it is all about whether the SPX can move on up to push nicely above
the 2100 level or whether the market is falling into an expanded trading range. The two bottom
channels of the chart show relative strength lines for the MS World index (excluding the US)
and euro Stoxx 600 compared to the SP 500. The global market ex the US is outperforming
the SPX and the Stoxx 600 is a particular favorite of traders who have moved the "QE moment-
um playbook" away from the US over to Europe to catch the ECB's QE program. The two
relative strength charts clearly show positive trend reversals in favor of major offshore markets
as opposed to the SP 500 after the SPX held sway for an extended period.
 

SPX -- Monthly

Looking back over SPX monthly chart for the longer run, there have been few MACD negative
crossovers during the past 20 years. SPX Monthly When they have occurred, the market has
either corrected meaningfully or entered a full blown bear. There is nothing biblical here, only
that negative changes in momentum have tended to involve follow through. Since the MACD
can whipsaw, there is no gospel here, only a possible red flag to keep in mind.

The monthly SPX chart shows what we already know, namely that the bull market in force has
been losing momentum for well over a year. The primary fundamentals that I use to view the
market suggest the bull may have entered a transition period from its reliance on the Fed's QE
as investors and traders try and gauge how well the market will hold up in a less generous
liquidity environment where progress of the real economy as it bounces back from the west
coast port strikes and bitter winter weather may or may not be hefty enough to have the Fed
signal Its intentions regarding  the ZIRP policy less ambiguously.

SPX -- Daily, Longer Term

US history shows that there have been few large bouts of sumptuous - sized QE and when they
are brought to a close, it is bad for the economy and for the stock market. QE 3, which was one
of the biggest programs, closed out last autumn after an extended period of tapering. The economy
has slowed markedly as expected but has not tanked, and the SPX has continued on to new highs
but with a steady erosion of positive momentum. The powerful run in the market from the latter
part of 2011 was based on the QE program and rising investor confidence as evidenced by a large
increase of the market's P/E ratio. It was a spectacular move which would have the SPX at 2400
now had it continued its brisk pace. SPX Daily

The SPX is still in bull mode, and my primary fundamental indicators have seen some erosion,
but remain positive, so there is no sell signal from me. But, the tempering of investor confidence
since last summer is appropriate. QE or not, whenever the Fed freezes the size of its balance sheet,
there is eventual trouble for the market, and the longer the freeze, the bigger the trouble. At present,
there is sufficient monetary liquidity in the system and plenty of financial support in the banking
system that the economy can regenerate sufficiently from a punishing winter to provide better
earnings out ahead. As long as consumer, business and banking confidence holds up, the
financial wherewithal and resources are there to support growth through 2016. The stock market
could be adversely affected initially when short term interest rates begin to rise, but should
have the resiliency to weather the end of the ZIRP and move on so long as the Fed follows a
slow and very gradual course.

If the economy can successfully transition away from dependence on QE, and confidence holds
up, then the next major threat to the stock market would come as monetary liquidity in real terms
begins to dissipate just as confidence moves into a frothier period. But that is not in the cards
right now. In the meantime, investors will have to put up with the volatility that may continue
as the economy moves into a more self - sustaining mode.

Oil Price

WT crude closed out 2014 in the $53 - 54 bl. area. The price experienced seasonal weakness in
Jan. and Feb. of 2015, and with a seasonal bounce in Mar. ended the week at $48.40. Further
seasonal strength lies ahead as refineries gear up for the major driving season. However, by
late April oil can enter a period of  modest weakness / volatility which can last through Aug.
WTIC weekly

So far this year the dramatic decline in the US rig count appears to have counterbalanced a
growing glut of US crude from fields using fracking technology. Trading volume in oil
has soared, but neither the bulls (those long on a fast declining rig count) or the bears (those
short on a growing excess supply) have been able to establish a decisive edge.

The oil price has very recently come out of the high speed crash downtrend it began in late
Sep. '14 but it is way too early to tell whether a solid bottom has been established in the mid-
$40's or whether crude can mount a significant seasonal rally over the course of Apr. The
oil market has not been able to hold above its 13 wk. m/a but may well challenge it in the
month ahead. WT crude is deeply oversold on RSI and MACD as well as against its 40 wk.
m/a.

I have long strictly been a trend trader on the oil price so my position would now be on the
side line. The bottom panel shows the weekly action of the US dollar. I have been a bull on
the dollar since the early stages of the economic recovery (2009). Since my long term
projection for the USD remains 100 or par in 2020, I now see the dollar's recent sharp upturn
as rather extended and will be watching the buck carefully to see if  further corrective
weakness might lead to stronger positive action in both oil and gold. 

SPX -- Daily Chart

As cautioned back on Feb. 22, the market did break out to an new all time high but it was on
a short term momentum overbought and that set up folks for a fail. The SPX is trading below
the late Feb. highs, but it has not been nearly as bad as it could have been given the Feb. set up.
SPX Daily

The market rallied off trend support at 2040 toward mid Mar. and with the recent weakness is
back down at trend support once again. Thus as the month end approaches, the uptrend off the
Oct. '14 is about to be tested once more. The SPX is now mildly oversold on a price momentum
basis, so there could be a decent bounce. If the SPX can recover back up to 2100 by the end of
the month it will meet the minimum requirement to hold the major p/e ratio expansion uptrend
in place since late 2011. Should it do so, it may again fall into the "bends but does not break"
and "buy the dip" categories that have characterized this particular and lengthy uptrend for the
SPX.

The SPX has so far failed to maintain positive momentum since mid - Nov. 2014. This action
most likely reflects the loss of economic growth momentum and the  mild pressure on SPX
reported earnings from a strong US dollar coupled with weak resource based results. There is
not strong evidence to say that investors are worried yet about having the Fed boost short term
rates.

China -- Beware The Shanghai

I posted bullish on China on Jun. 3, 2014. There were easy, low risk trades. I even raised my
fair value level on the Shanghai for 2015 to 2750 subsequently. The market is now parabolic
and we are witnessing the same sort of folly we saw over 2006 - 07 and in 2009. Shanghai

China has the PBOC abandoning its monetary discipline again to grow the money supply
vigorously in view of continuing tepid economic performance. Because the Xi government is
also trying to implement reforms, it remains unclear how unabashedly aggressive the central
bank will continue to be in wielding policy. China Money M-2

The Shanghai market is now hugely overbought on the indicators and is trading a whopping
36% above its 40 wk. m/a. Whatever upside is left on the current parabolic run higher, figure
there is a 1,000 points of downside if Xi and his guys put the leash on the PBOC at some
point out ahead.

For those who want to stay long China equities, it is essential to watch central bank monetary
operations from week to week. The S&P China Spyder GXC is in the bottom panel of the
Shanghai chart. It is a version of an index fund and does not exhibit the craziness of the SSEC.

Monetary Policy

The case for raising short term interest rates based on well established long term standards is
weakening. Since the autumn, business new order strength has moderated as has manufacturing
activity. Plant operating rates have fallen as capacity growth remains at a 3.1% annual pace
while output growth has moderated. My short term supply / demand pressure gauge stands at
a moderate +4.3 in favor of demand and is down from late last year because private sector
liquidity has accelerated. Bank deposit growth has been sufficient to offset a recent reduction of
$20 bil. in Fed Bank Credit without roiling the short end of the market.

Some of the easing of economic demand reflects anticipated adjustment to the close out of the
QE 3 program and some of it comes as a result of severe winter weather in the eastern portion
of the US. Spring arrives this weekend but we here in the east have been moving from ultra-
winter to just plain winter.

The Fed now awaits seeing whether a spring thaw brings more vigorous economic activity or
whether the economy has lapsed into a slow growth rut. The benefits of the huge QE program
are on the wane, but private sector credit availability is on the rise and the banking system is
still nicely liquid.

With inflation having decelerated substantially over the past three years, my super long term
3 mo. bill fair value yield model suggests that the Bill should now be yielding only 1.5%. From
this low base it may be the case that if the economy rebounds as the year progresses and
inflation does not accelerate dramatically, the end to the Fed's ZIRP need not produce a large
surge in short rates.

As a growth oriented player, I am hoping the transition from Fed quantitative ease to private
sector credit generation works relatively smoothly. The hard data now supports a solid
transition, but that does not cover a very key variable: private sector confidence that the
economy can carry on. The few past episodes in US history of transitions from quantum Fed
easing to dependence on the private sector have not worked out well with the sustainability
of confidence the weak link. So, we hope for the best.

SPX -- Weekly

Fundamentals
Since the termination of the QE 3 program became a done deal in Sep. 14, the positive momentum
of the SPX has deteriorated along with the growth of total system financial liquidity and the real
economy. Liquidity has continued to fade in growth, but with inflation so low, the capacity of the
real economy to progress has not been exhausted.

My forward looking weekly cyclical fundamental indicator has been diverging internally. The
indicator, excluding sensitive materials prices, has flattened out since last autumn, while the
industrial commodities composite, which includes spot oil and fuels, has weakened considerably.
Continuing excess production capacity in China has also suppressed the index, and since China
is the largest user of cyclically sensitive materials, the behavior of the index overstates the case for
slower US economic performance. Even so, the short term leading indicator composite favors
slower growth ahead with relief from another severe winter east of the Mississippi likely to soften
the blow.

the big story for the market since late 2011 has been the sharp elevation of the p/e ratio as investors
have used nominal short term interest rates and sharply decelerating inflation to boost valuations
across the board circa the behavior of the market the through the mid - 1960s. There has been a
broad boost to investor confidence so strong that the "buy the dips" mentality has been in force for
over three years. It has only been recently that the willingness to push the markets' p/e higher has
been challenged via the termination of QE 3, the prospect for flatter earnings and, now, stronger
speculation about whether and when the Fed may abandon Its ZIRP.

Investors must now assume significantly higher risk to stay in the game on the long side.

Technical
The SPX is not materially overbought on a price momentum basis, but internals such as RSI and
MACD show a pattern of steady but graceful deterioration from exalted levels set in mid - 2013.
The pattern of graceful unwinding of the enormous overbought weekly readings set back in '13
are powerful testimony for investor confidence and determination to stay in the game on the
long side. Historically well founded technical warning signs have been ignored and only folks
who have heeded them have paid the price. SPX Weekly

To hold the longer run trend from late 2011, the the SPX needs to finish out this month above or
close to 2100. It is possible the eagerly awaited FOMC meeting and subsequent Yellen press
briefing  this week will have significant bearing on whether the market holds trend near term.
Interestingly, extending the trend line through Jun. gives an SPX reading of 2200. Another
substantial challenge for the bulls.

SPX -- Daily

As posted on 2/22, I urged caution on the SPX breakout given that it had become significantly
overbought short term. I have also argued that price breakouts from short term consolidation
periods can sometimes whipsaw. And, this is what has come to pass. SPX Daily Nasty business
for the follks who were enticed by the breakout.

With the recent sell off, the SPX is right above intermediate term trend support at 2040 and has
broken modestly below longer range support dating back to late 2011. (The market has had
several breaks below longer term support, but all have been minor and were remedied quickly
by subsequent rallies.)

The SPX is now mildly oversold on a price momentum basis and the RSI measure is headed
down to an oversold reading as well. With the recent weakness, the index is now down into the
middle of the 2000 - 2080 range that has mostly held sway since Nov. '14.

The proximate cause of the sell off in Mar. was the stronger than expected jump in jobs
which has triggered concern that the Fed might elect to finally begin to raise rates at the
short end. The Fed has been suppressing short rates for a while and the one item on Their
current checklist -- inflation that is too low -- has yet to turn. More broadly though, it may
be too early for the markets to speculate on rising short rates. As I have suggested several
times over past months, the end of QE 3 would lead to a curtailment of liquidity growth and
a slowdown in real economic progress. Since Aug. '14, all industry new order PMI has
fallen from a very strong 65.9 down to a still positive but more modest 54.6 Complicating
matters are the effects on general business activity from the prior west coast dock strikes
and another snowy and bitterly cold winter in the eastern third of the US. The very recent
action of the stock market suggests players see labor issues and the bad weather as temporary
pressures on growth and that with springtime there will be enough of a bounce back in the
economy to keep worries elevated that the Fed may begin to end Its ZIRP.

The lack of clarity on how well the economy will do short term and the prospective
continuation of low inflation may leave players guessing on Fed intent for a brief while and
since I am almost always reluctant to engage in divining Fed intent, I do not plan to shift
primary fundamentals away from a still positive view.

Gold Price

The gold price has been in a bear market for several years now, but what is intriguing about it
has been the shelf of support around the $1200 level . Gold Daily

Gold has experienced trade worthy early in the year seasonal rallies in both 2014 and the current
year. The rallies did not hold, and here in 2015, we find gold back down to shelf support at
$1200. In an admittedly flippant argument back in late Nov. '14, I traced out how the gold
price might fare better this year, with my thought  being that gold might be dragged up by
a weaker US dollar as offshore QE programs might bring a firming of growth abroad and
erode the strong safe haven status given to the greenback since mid - 2014. I have been thinking
this would take place over the second half of the year. Although the blow out in the oil price
has made this roundabout argument shakier and perhaps also reduced gold's eventual upside, I
still think it is an interesting one given the usual positive economic response to QE programs by
major central banks. I suppose it would also help gold's case if the euro was to recover some
ground against the dollar as the EZ's economic prospects improve.

I have the US stock market primary fundamentals as still positive, but this does not preclude
either a price correction, or, as has been happening recently, the beginning of rotation out
of US equities to foreign stocks. I make this point because gold has struggled against the
surge of US stocks since latter 2011.

If you are partial to gold, you might want to keep this homily on the metal's possible potential
in mind.

SPX -- Weekly

As it comes off a strong Feb., the SPX is at an important juncture on the weekly chart, as it
is nearing positive reversals of intermediate term downtrends in RSI, MACD, and 52 wk.
price momentum. Interesting couple of weeks ahead. Weekly SPX Also view the monthly
chart in the post just below to note how strong monthly MACD is being tested.